Estimating The Fair Value Of I.Kloukinas-I.Lappas S.A. (ATH:KLM)

Key Insights

• The projected fair value for I.Kloukinas-I.Lappas is €1.65 based on 2 Stage Free Cash Flow to Equity
• Current share price of €1.50 suggests I.Kloukinas-I.Lappas is potentially trading close to its fair value
• I.Kloukinas-I.Lappas' peers seem to be trading at a higher discount to fair value based onthe industry average of 15%

In this article we are going to estimate the intrinsic value of I.Kloukinas-I.Lappas S.A. (ATH:KLM) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for I.Kloukinas-I.Lappas

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (€, Millions)	€3.93m	€4.49m	€4.97m	€5.38m	€5.74m	€6.04m	€6.31m	€6.55m	€6.77m	€6.98m
Growth Rate Estimate Source	Est @ 19.34%	Est @ 14.27%	Est @ 10.72%	Est @ 8.24%	Est @ 6.50%	Est @ 5.29%	Est @ 4.44%	Est @ 3.84%	Est @ 3.42%	Est @ 3.13%
Present Value (€, Millions) Discounted @ 10%	€3.6	€3.7	€3.7	€3.6	€3.5	€3.3	€3.2	€3.0	€2.8	€2.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €33m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 10%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = €7.0m× (1 + 2.5%) ÷ (10%– 2.5%) = €90m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €90m÷ ( 1 + 10%)¹⁰= €34m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €66m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of €1.5, the company appears about fair value at a 9.3% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at I.Kloukinas-I.Lappas as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 10%, which is based on a levered beta of 1.105. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for I.Kloukinas-I.Lappas

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For I.Kloukinas-I.Lappas, we've compiled three additional aspects you should further research:

1. Risks: Take risks, for example - I.Kloukinas-I.Lappas has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.
2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ATSE every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.